Capstone Therapeutics Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012; filed November 8, 2012. The filing identifies the registrant as Capstone Therapeutics Corp., a development-stage biotechnology company, rather than Capstone Holding Corp.
Business Context and Reporting Period
The company had ceased clinical development of AZX100 in dermal scarring and discontinued TP508 development, returning related intellectual property to the University of Texas Medical Branch. Operations were reduced to a virtual model with two employees and three directors as of September 30, 2012.
On August 3, 2012, the company formed LipimetiX Development, LLC, a 60%-owned consolidated joint venture, to develop AEM-28 and analogs for severe refractory hypercholesterolemia and homozygous familial hypercholesterolemia. The initial development plan targets an IND filing and Phase 1a and 1b/2a trials over approximately 27 months.
Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | No revenue reported | No revenue reported |
| General and administrative expense | $0.5 million, versus $0.4 million | $1.3 million, versus $2.4 million |
| Research and development expense | $0.7 million, versus $1.2 million | $1.6 million, versus $4.7 million |
| Total operating expenses | $1.1 million, versus $1.6 million | $2.9 million, versus $7.0 million |
| Net loss attributable to Capstone stockholders | $1.0 million, or $0.02 per share, versus $1.6 million, or $0.04 | $2.6 million, or $0.06 per share, versus $7.0 million, or $0.17 |
| Cash flow from operating activities | Not separately presented | $(2.2) million, versus $(6.8) million |
There was no operating revenue, so revenue growth and operating margins are not meaningful. Interest and other income was $93,000 for the nine-month period, including an $80,000 gain on the sale of laboratory equipment.
Cash and cash equivalents were $11.4 million at September 30, 2012, down from $13.8 million at December 31, 2011. Approximately $5.0 million was reserved for LipimetiX and unavailable for general corporate use. Other current assets were $0.3 million, and total current liabilities were $0.2 million. The filing does not report debt.
Total assets were $12.7 million, including $1.0 million of patent license rights. Total equity was $12.5 million, including $0.5 million of noncontrolling interest. Accumulated deficit was $177.2 million.
Material Changes Versus the Prior Comparable Period
- Operating expenses and losses declined substantially because of employee reductions and the wind-down of internal research and development activities.
- Third-quarter G&A expense increased to $0.5 million from $0.4 million, primarily due to approximately $139,000 of joint-venture transaction costs.
- Third-quarter R&D expense declined to $0.7 million from $1.2 million, although LipimetiX contributed approximately $0.5 million of operating expense.
- The company contributed $6.0 million to LipimetiX, including $5.0 million of preferred units and $1.0 million of voting common units. The joint venture’s patent rights were recorded at approximately $1.0 million.
- Cash used in operations improved to $2.2 million from $6.8 million for the comparable nine-month period, but the company also committed substantial cash to the new joint venture.
- Headcount declined from 18 employees in October 2011 to two at September 30, 2012.
Guidance, Outlook, Risks, and Unusual Items
Management estimated 2012 internal operating expenditures of approximately $2.5 million, excluding the $6.0 million joint-venture contribution and potentially significant qui tam litigation costs. Management expected cash and short-term investments at September 30, 2012 to fund projected requirements for the next year, but stated that substantial additional capital would be required to complete clinical development and obtain regulatory approval.
The principal development and liquidity risks are failure to obtain FDA Orphan Drug designation for AEM-28, unfavorable preclinical or clinical results, development delays or budget overruns, inability to secure additional financing or a strategic transaction, and impairment of the company’s investment in LipimetiX. The joint venture’s initial funding is intended to support development for approximately 27 months, but additional funding may be required.
The company remains subject to a qui tam lawsuit alleging violations of federal and state false-claims and anti-kickback laws relating to its former bone-device business. The government declined to intervene, no trial date had been set, and discovery had not begun. Management believed a material loss was not reasonably possible based on available information, but the potential damages could exceed the company’s financial resources and the ultimate outcome remains uncertain.
Joint-venture losses of $191,000 had been allocated to noncontrolling interests. Because the noncontrolling interests are not required to fund negative capital accounts, the company could ultimately absorb additional joint-venture losses. Management stated that the joint venture eliminated the prior uncertainty regarding corporate strategy that had raised substantial doubt about going-concern status at December 31, 2011.
Investor Verification Items
- Confirm the registrant’s identity and corporate relationship because the supplied metadata names Capstone Holding Corp., while the filing names Capstone Therapeutics Corp.
- Verify the availability of cash: $11.4 million was reported, but $5.0 million was restricted to LipimetiX.
- Track AEM-28 development milestones, including FDA IND allowance and any Orphan Drug designation.
- Assess whether the $6.0 million LipimetiX investment can be recovered and whether additional funding will be required.
- Monitor the unresolved qui tam litigation, including potential damages, legal costs, and effects on liquidity or strategic transactions.
- Reconcile the reported consolidated net loss with the loss attributable to Capstone stockholders and the noncontrolling interest allocation.